Back in 350 B.C., Aristotle observed that assigning monetary value to an otherwise insignificant thing – such as a coin – could only happen because of the human capacity for trust.
He noted that through their trading relationships, people had evolved a natural, psychological capacity to place trust in each other, as part of a trading exchange.
Today, it is well documented that trust is low in, and across, financial markets. A culture of excess, charges of lax compliance and regulation and the behavior of some has caused enormous reputational, political and societal damage.
Maintaining trust across increasingly digitalised wholesale markets has proved to be expensive, time-consuming, and inefficient.
Emerging financial technology (fintech), however, has the potential to bridge this divide.
Financial technology has been the breakout investment and research success story of the past few years. Investment in fintech is expected to accelerate to over $150 billion over the next five years, with over $50 billion already invested in roughly 2,500 in technology companies.
This includes over $1.4bn invested to explore the application of blockchain and distributed ledger technology to wholesale markets.
Financial technology has the capacity to hardwire trust into systems which do not disrupt, but instead supplant duplicative, inefficient processes.
Auditable, traceable electronic trails, smart analytics, next generation API, artificial intelligence and advancements in crypto-security offer additional resilience, trading and reporting capabilities.
But it is the potential for blockchain and distributed ledger technology to replace physical middlemen with mathematics which is the real reason this technology matters – proving the authenticity of records, content, and transactions across institutional boundaries – effectively automating trust between counterparties.
China already plans to use blockchain for social security payments while Australia had indicated it sees blockchain as a suitable application to run its voting systems.
A recent poll of tier 1 bank CEOs, CTOs and trading desk heads agreed that ‘integrated, applied technology’ offers a great opportunity to control costs and improve performance, ahead of ‘talent management’, and only just behind ‘effective leadership’ at 98%.
A similar percentage (88%) predict their organisation will increase or maintain their fintech investment over the next three years.
Financial markets today consist of people and technology, cemented by trust in the integrity and resiliency of a market, its physical operation and those using it to trade, invest or exchange risk.
So is fintech riding in on a white charger to solve every aspect of malfeasance in financial markets?
Not exactly. In fact, it cuts both ways and there is an equal challenge to avoid the impression and the reality of an all-out fintech arms race, where technological advantage buys financial advantage, say through super-fast market data at a premium, to take one example.
The banks are in a tough spot right now. Pressure is everywhere and they have to do more with less, faster and more efficiently.
Just recently a number of leading market-making banks got together to discuss how they could share their middle office functions as part of a drive to cut costs associated with the custodian function.
There is so much that is ripe for renewal and there are short and long term investment decisions to be made. The smart CEO is listening to his CTO and CIO very closely indeed.
Finally, a word on the financial transgressions of the past. It is ironic that the guilty were damned by technology; the smoking evidence of malfeasance was enshrined in reams of Bloomberg chats, preserved for the law in that iconic font (Blpu for the graphic designers out there).
It is of course an error to ascribe absolute moral imperative or a conscious policing function to any electronic system.
Those are human preserves which need to come from leadership and culture, but financial technology is the agent of delivery – it can only facilitate.
Confucius, another smart guy you may have seen quoted on motivational social media posts, said a ruler needs three things – weapons, food, and trust; if he has to give up any of these, weapons go first, then food.
Without trust we cannot stand. It is time to hard code it into our financial system.
The author is the principal of Chatsworth, a London and New York-based consultancy with a focus on the financial technology sector.